- Gold climbs, reacting to Fed Chair Powell’s hawkish comments and mixed US data.
- Tensions in the Middle East escalate, influencing Gold’s status as a safe-haven asset.
- Market expectations reduce the likelihood of multiple Fed rate cuts this year.
Gold prices edged higher late in Tuesday’s North American session, gaining 0.22% following a hawkish tilt by Federal Reserve Chair Jerome Powell. Economic data from the United States (US) was mixed, though Monday’s Retail Sales report and Powell’s remarks kept US Treasury yields higher, capping the yellow metal’s advance.
XAU/USD trades at $2,388 after hitting a daily low of $2,363. Risk appetite has deteriorated amid the heightened tensions in the Middle East. Following Iran’s attack on Israel over the weekend, the latter is set to retaliate even though the White House warned that it would not participate.
Given the backdrop, Gold is set to continue advancing, if not because Fed Chair Jerome Powell said that the US economy has performed quite strongly while acknowledging that recent data shows a lack of further progress on inflation.
Following those remarks, traders reduced expectations for the Federal Reserve to cut rates more than once this year, according to Reuters. The CME FedWatch Tools shows the first rate cut could happen in September, with odds for a quarter of a percentage point standing at 71.38%.
Daily digest market movers: Gold traders ignore higher US yields, strong production output data
- In March, US Building Permits saw a decrease of 4.3%, dropping to 1.458 million, which was below the expected 1.514 million and February’s figure of 1.523 million. Additionally, Housing Starts experienced a significant drop of 14.7%, falling from 1.549 million to 1.321 million, well under the forecast of 1.48 million.
- The Federal Reserve reported that March’s Industrial Production was stable, meeting both estimates and the previous month’s growth rate of 0.4% MoM.
- Despite mixed economic indicators, market participants remain focused on strong March US Retail Sales data released on Monday. Particularly noteworthy was the control group’s performance—essential for GDP calculations—which significantly exceeded both forecasts and the previous month’s results.
- Despite decent US economic data, market participants seem to be focused on geopolitical risks. Sources cited by The Jerusalem Post revealed that Israel has reportedly finalized plans for a counterstrike against Iran.
- Gold’s price remains high even though US Treasury yields are climbing more than 5 basis points (bps) in the belly and long end of the yield curve.
- US Dollar Index (DXY), which tracks the buck’s performance against a basket of six other currencies, gains 0.11% to 106.29, levels last seen in November 2023.
- Gross Domestic Product (GDP) estimates for Q1 2024 show that the US economy is expected to grow 2.9%, up from 2.8% estimated on April 15, according to the Atlanta GDPNow model.
Technical analysis: Gold buyers remain in charge despite RSI being in overbought levels
Gold is upwardly biased, though the uptrend seems overextended, increasing the risks of a pullback. Nevertheless, according to Dow Theory, the trend is more likely to continue than reverse. That said, after dipping on Friday, the Relative Strength Index (RSI) is aiming upward again, with buyers stepping in, opening the door to challenge the $2,400 figure. A breach of the latter will expose the all-time high at $2,431, followed by $2,450.
On the flip side, a daily close below the April 12 close of $2,343 could open the door to push Gold’s price toward the $2,300 mark. Once cleared, the next support would be the April 5 swing low of $2,267.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.